1st May 2020 - Whippy price action leaves AUD longs in doubt

Good morning

OVERNIGHT DATA AND HEADLINES

Millions more Americans filed claims for unemployment benefits last week, suggesting that layoffs were spreading to industries that were not initially directly impacted by business closures and disruptions related to the novel coronavirus. Initial claims for state unemployment benefits totaled a seasonally adjusted 3.839 million for the week ended April 25. While that was down from 4.442 million in the prior week and marked the fourth straight weekly drop in applications, the numbers are still at levels unimaginable just months ago. Economists polled by Reuters had expected 3.50 million claims in the latest week. The claims report also showed the number of people receiving benefits after an initial week of aid surged 2.174 million to 17.992 million in the week ended April 18.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slumped by a record 7.5% last month. Spending was ironically depressed by a plunge in outlays on healthcare as dental offices closed and hospitals postponed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19. Spending increased 0.2% in February.

Monthly inflation was subdued in March, with the personal consumption expenditures (PCE) price index excluding the volatile food and energy components dipping 0.1%. That was the weakest reading since March 2017 and followed a 0.2% gain in February. In the 12 months through March, the so-called core PCE price index increased 1.7% after rising 1.8% in February. The core PCE index is the Federal Reserve's preferred inflation measure for the U.S. central bank's 2% target. When adjusted for inflation, consumer spending plunged a record 7.3% in March, setting consumption on a sharply lower path heading into the second quarter.

Personal income plummeted 2.0% in March, the most since January 2013, reflecting decreases in compensation. Americans who are still employed stashed away cash, boosting the saving rate to 13.1%, the highest since November 1981, from 8.0% in February.

The European Central Bank tweaked policy around the edges but kept the door wide open to further stimulus - including potentially controversial purchases of junk debt - to help an economy ravaged by the coronavirus pandemic. Facing an unprecedented recession, the ECB said it would make loans to banks even cheaper but kept the terms of its hallmark asset purchase scheme unchanged, disappointing investors who had bet on even more money-printing. The ECB said it would allow banks to borrow long-term funds for rates as low as minus 1% and it would set up a new shorter-term liquidity operation. Speaking to an empty press room, Lagarde said the euro zone economy could shrink by 5% to 12% this year and may contract by 15% in the second quarter alone, a rate that would far outpace any decline during the global financial crisis a decade ago.

The euro zone economy shrank by 3.8% in the first quarter, only part of which was affected by the lockdowns, underperforming expectations for a 3.5% drop in GDP. Inflation slowed to just 0.4%, far from the ECB's target of almost 2%, and is set to drop into negative territory in the coming months as a result of the oil price crash.

China's official Purchasing Managers' Index (PMI) eased to 50.8 in April from 52 in March but stayed above the neutral 50-point mark that separates growth from contraction on a monthly basis. Worryingly, a sub-index of export orders dived to 33.5 in April from 46.4 in March with some factories even having their orders cancelled after reopening. Export orders in the private Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) survey contracted at the fastest pace since global financial crisis. The survey, which focuses mostly on small and export-oriented businesses, showed activity for Chinese factories unexpectedly shrank this month.

U.S. stocks lost ground as grim economic data and mixed earnings prompted investors to take profits at the close of the S&P 500's best month in 33 years, a remarkable run driven by expectations the economy will soon start recovering from crushing restrictions enacted to curb the coronavirus pandemic. While risk-off selling pulled all three major U.S. stock averages into the red, the S&P 500 and the Dow posted their largest monthly percentage gains since January 1987, with the Nasdaq having its best month since June 2000. Dow Jones fell 288 points (1.17%) to 24,345.72, S&P 500 lost 27 points (0.92%) to 2,912 and the Nasdaq fell 25 points (0.28%) to 8,889.

CURRENCIES

The USD plummeted overnight, the DXY index falling from 99.80 highs but fell back to 98.99, down 0.50% on the day.

EUR made impressive gains after the ECB announcement, jumping up 0.80% from 1.0833 to 1.0973.

GBP saw a similar reaction, bouncing off a lower USD to gain 1.00% towards 1.2643 highs.

USDJPY weakened from around 106.47 up towards 107.50 highs

AUD initially broke lower through 0.6500 supports to a 0.6490 low, bounced back up to 0.6564 and then headed lower towards 0.6513.

NZD made a jump higher to its best performance since March 13th, reaching a 0.6177 high but fell lower towards 0.6125 into the close.

AUDNZD dipped 100 points, falling from 1.0703 previous highs to a 1.0603 low but found a small rebound to 1.0623.

AUDEUR capitulated under the weight of a stronger EUR, falling from 0.6044 to a 0.5941 low.

TREASURIES

U.S. Treasury yields tumbled with the two-year note yield falling to its lowest level since 2011 at one point on month-end market manoeuvring as stocks slipped on the heels of more grim news on the coronavirus-battered economy.

The benchmark 10-year yield was last down 2.9 basis points at 0.5983%.

The two-year U.S. Treasury yield dropped to as low as 0.176% and was last down 1.5 basis points at 0.1838%.

German bond yields fell further to 1-1/2-month lows and bank stocks extended losses after the ECB held off from making big moves at its policy meeting on Thursday. Most euro zone bond rallied during the meeting. Germany's benchmark 10-year bond yields declined to as low as -0.57%, the lowest since mid-March.

COMMODITIES

Spot gold fell 1.6% to $1,683.72 per ounce, having hit a low since April 22 at $1,680.25. For the month, Gold has risen more than 7% having hit $1,746.50 an ounce on April 14, a more than seven-year high.

Chinese iron futures ended higher, logging a monthly gain, as demand hopes improved after data showed manufacturing activity in the country expanded for a second straight month. The most-traded September iron ore contract on the Dalian Commodity Exchange closed up 2.5% at 610 yuan ($86.38) per tonne. It notched a monthly gain of 5.35%. Spot prices of iron ore with 62% iron content for delivery to China were unchanged at $84 per tonne.

Copper eased as lingering fears for a long recovery ahead for China pulled benchmark LME copper down 1.3% to $5,196 per tonne. Prices touched their highest in over six weeks in early trade, helped by a reading of China's official factory activity showing faster expansion in April.

Other prices: LME aluminium eased 1.1% to $1,489.50 a tonne, zinc fell 0.6% to $1,933.50, lead shed 1.2% to $1,631, tin lost 1.1% to $15,135, and nickel shed 0.9% to $12,205.

Oil prices jumped after several producers said they would cut output and as signs the U.S. crude glut was not growing as quickly as many had feared brought an upbeat close to one of the most volatile months for oil trading in history. On its last day as the front-month, Brent futures for June delivery rose $2.73, or 12%, to settle at $25.27 a barrel, while U.S. West Texas Intermediate (WTI) crude for June rose $3.78, or 25%, to settle at $18.84.

AUD lost considerable ground overnight, falling after the US jobless claims to break 0.6500 support at 0.6490 lows, rebounding back up to test 0.6564 highs and then lower into the NY close (currently at 0.6508).

A break lower in U.S. equities, fuelled by U.S. jobless claims and ECB results was the initial catalyst for the risk off trading, bouncing back higher as USD sold off aggressively which pushed major currencies higher.

AUD was headed for its best monthly performance in four years as investors wagered the worst of the coronavirus lockdowns might be over, cementing a remarkable recovery from the dark days of March. It has enjoyed the view at 0.6550 having climbed 6.5% so far in April, the largest gain since March 2016. It was also 10 cents higher than the 17-year trough of 0.5510 touched in mid-March when markets were in a pandemic panic. Its recovery has been broad based, with gains of 5.8% AUDJPY, 6.3% on AUDGBP and a stellar 8.1% on AUDEUR (the largest such rise since 1993).

Economic data releases remain second tier today/overnight, with markets pretty much pricing in more negative results than the release for the months of March and April. A relatively quiet day is expected ahead with long list of countries out today observing the May Day holiday including Singapore, Honk Kong and the UK.

For the AUD, opens this morning off its overnight 0.6565/70 highs and down at around 0.6507. The selloff stalled ahead of the 100 day moving average (0.6492) which will provide solid support into today. Daily RSI’s have diverged after a 36-day high set which implies downside risk growing. Monthly technical outlook suggests upside still a possibility, testing near 0.6700.